As per Collins English dictionary, meaning of corporate Restructuring is a change in the business strategy of an organization resulting in diversification, closing parts of the business, etc, to increase its long-term profitability.
Corporate Restructuring is defined as the process involved in changing the organization of a business. Corporate restructuring can involve making dramatic changes to a business by cutting out or merging departments that often has the effect of displacing staff members.
Corporate Restructuring in India:
The opening up of the Indian economy and the government’s decision to disinvest, and take apart all certain qualitative and quantitative fetters has made corporate restructuring more relevant today, bound by the present economic scenario and market brands. In the last few years, Indian corporate sector has followed the worldwide trend in consolidation amongst companies through mergers, acquisitions and strategic interventions
The process of mergers and acquisitions has gained substantial importance in today's corporate world. This process is extensively used for restructuring the business organizations. In India, the concept of mergers and acquisitions was initiated by the government bodies. Some well known financial organizations also took the necessary initiatives to restructure the corporate sector of India by adopting the mergers and acquisitions policies. The Indian economic reform since 1991 has opened up a whole lot of challenges both in the domestic and international spheres. The increased competition in the global market has impelled the Indian companies to go for mergers and acquisitions as an important strategic choice. The trends of mergers and acquisitions in India have changed over the years. The immediate effects of the mergers and acquisitions have also been diverse across the various sectors of the Indian economy.
As per the analysis of IMAA, the total Mergers & Acquisitions (M & A) occurred for the year 2011 was approximately around 700 transactions and the total value of transactions amounting to 35 billion U$D. The following chart illustrates about the detailed transactions of M & A for the past 13 years from 1999 to 2011.
Corporate Restructuring as a Business Strategy
Corporate restructuring is the process of significantly changing a company's business model, management team or financial structure to address challenges and increase shareholder value. Restructuring may involve major layoffs or bankruptcy, though restructuring is usually designed to minimize the impact on employees, if possible. Restructuring may involve the company's sale or a merger with another company. For some businesses, restructuring is not enough to save a company from crumple. In other cases, it can add substantial shareholder value.
Companies use restructuring as a business strategy to ensure their long-term viability. Shareholders or creditors might force a restructuring if they observe the company's current business strategies as insufficient to prevent a loss on their investments. The nature of these threats can vary, but common catalysts for restructuring involve a loss of market share, the reduction of profit margins or declines in the power of their corporate brand. Other motivators of restructuring include the inability to retain talented professionals and major changes to the marketplace that directly impact the corporation's business model.
Objectives of Corporate Restructuring:
1. To unload loss making Businesses
2. To Eliminate Debt
3. To Respond to Changing Trends
4. To Meet Regulatory Change
5. To order redirection of the firm’s activities;
6. To Organize surplus cash from one business to financed profitable growth in another;
7. To reduce risk
8. To develop core competencies
9. To Improve Debt-Equity ratio
10. To obtain tax benefit by merging a loss making company with a profit making company.
11. To have a better market share.
12. To eliminate competition between the companies
Needs of Corporate Restructuring:
1. To focus on core strengths, operational synergy and efficient allocation of managerial Capabilities and infrastructure.
2. Consolidation and economies of scale by expansion.
3. Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.
4. Acquiring constant supply of raw materials and access to scientific research and technological developments.
5. Capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and improve return on capital employed.
Legal and Regulatory Guidelines for Corporate Restructuring:
a. The Companies Act. 1956
b. Income Tax Act,1961
c. Listing Agreement
d. Companies (Court) Rules,1959
e. The Indian Stamp Act,1899
f. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,2011
g. The Companies Bill, 2011
Tools of Corporate Restructuring:
Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption. The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock
Horizontal Merger: It is a merger of two or more companies that compete in the same industry. It is a merger with a direct competitor and hence expands as the firm’s operations in the same industry. Horizontal mergers are designed to produce plenty economies of scale and result in decrease in the number of competitors in the industry.
Vertical Merger: It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system. If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities. On the other hand, Forward integration may result if a company decides to take over the retailer or Customer Company. Vertical merger may result in many operating and financial economies. Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network
Co generic Merger: In these mergers the acquirer and target companies are related through basic technologies, production processes or markets. These mergers represent an outward movement by the acquiring company from its current set of business to adjoining business. The potential benefit from these mergers is high because these transactions offer opportunities to diversify around a common case of strategic resources.
Conglomerate Merger: These mergers involve firms engaged in unrelated type of activities i.e. the business of two companies are not related to each other horizontally nor vertically. In a pure conglomerate, there are no important common factors between the companies in production, marketing, research and development and technology. Conglomerate mergers are merger of different kinds of businesses under one flagship company. The purpose of merger remains utilization of financial resources enlarged debt capacity and also synergy of managerial functions. It does not have direct impact on acquisition of monopoly power and is thus favored throughout the world as a means of diversification.
It is a form of corporate restructuring in which the entity's business operations are segregated into one or more components. It is the converse of a merger or acquisition. A demerger may possible through a Spin off, Split off, Split up and Sell off.
Spin off: In spin off company distributes its shareholding in subsidiary to its shareholders without changing the ownership pattern.
Split off: The act of splitting off is a part of an existing company to become a new company, which operates completely separate from the original company. Shareholders of the original company are usually given an equivalent stake of ownership in the new company.
Split up: If an existing company is dissolved to form a new company it is known as split up.
Sell off: If a company sells its non- profit making division it results in sell off.
A demerger is often done to help each of the segments operate more smoothly, as they can now focus on a more specific task.
3. Reverse Merger:
Reverse merger is the opportunity for the private companies to become public company, without opting for Initial Public offer (IPO).In this process the private company acquires the majority shares of public company, with its own name.
Disinvestment means the action of an organization or government selling or liquidating an asset or subsidiary. It is also known as "divestiture". A company or government organization will divest an asset or subsidiary as a strategic move for the company, planning to put the proceeds from the divestiture to earn a higher return on investment
5. Take over/Acquisition:
Takeover means an acquirer takes over the control of the target company. It is also known as acquisition. Normally this type of acquisition is undertaken to achieve market supremacy. It may be friendly or hostile takeover.
Friendly takeover: In this type, one company takeover the management of the target company with the permission of the board.
Hostile takeover: In this type, one company takeover the management of the target company without its knowledge and against the wish of their management.
6. Joint Venture (JV):
A joint venture is an entity formed by two or more companies to undertake financial activity together. The parties are agree to contribute equity to form a new entity and ready to share in the revenues, expenses, and control of the company. It may be Project based joint venture or Functional based joint venture.
Project based Joint venture: The joint venture entered into by the companies in order to achieve a specific task is known as project based JV.
Functional based Joint venture: The joint venture entered into by the companies in order to achieve mutual benefit is known as functional based JV.
7. Strategic Alliance:
Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives and allows to remain independent organization is called strategic alliance.
Franchising may be defined as an arrangement where one party (franchiser) grants another party (franchisee) the right to use trade name as well as certain business systems and process, to produce and market a good service according to certain specifications.
The franchisee usually pays a one –time franchisee fee plus a percentage of sales revenue as royalty and gains.
9. Slump sale:
Slump sale means the transfer of one or more undertaking as a result of the sale of lump sum consideration without values being assigned to the individual assets and liabilities in such sales. If a company sells or disposes of the whole or substantially the whole of its undertaking for a predetermined lump sum consideration, then it results in a slump sale.
10. Buy Back:
Buy back means the repurchase of outstanding shares by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available or to eliminate any threats by shareholders who may be looking for a controlling stake. The Company may buy back its own shares from the open market over an extended period of time, by utilizing the Free Reserve amount and Securities Premium Account.
Risks of Corporate Restructuring:
a. The company fails to improve its business position and is forced to close.
b. A poorly managed restructuring can introduce greater uncertainty with shareholders and result in stock price declines.
c. Even well-executed restructuring can threaten a business's trustworthiness and brand.
d.Restructuring in some severe cases may also involve greater government control over decision-making at the company, especially in serious economic times.
In legal terminology, the situation where the liabilities of a person or firm exceed its assets. In practice, however, insolvency is the situation where an entity cannot raise enough cash to meet its obligations, or to pay debts as they become due for payment. Mere insolvency does not afford enough ground for lenders to petition for involuntary bankruptcy of the borrower, or force a liquidation of his or her assets.
A company is considered to be insolvent, if it is unable to pay its debts.
There are two tests for corporate insolvency:
a. Cash-Flow test: If the company is unable to pay its debts as and when they fall due for payment and
b. Balance Sheet test: If the value of the company's assets less than the amount of its liabilities.
The new corporate insolvency law, The Companies (Second Amendment) Act 2002 is now operational and the Sick Industrial Companies (Special Provisions) Act 1985 has been retracted by the Sick Industrial Companies (Special Provisions) Repeal Act 2003. In India now, procedures for the restructuring and insolvency of companies are contained in the same Act. The Second Amendment is an attempt to create a balance between restructuring and insolvency. The Second Amendment seeks to provide a quick, convenient and timely procedure for dealing with the affairs of a sick industrial company
A sick industrial company is defined as an industrial company that has, at the end of a financial year, accumulated losses equal to 50% of the average net worth of the company in the four preceding financial years, or which has been unable to pay creditors as debts have fallen due in three consecutive quarters.
Objectives of Corporate Insolvency:
a. To restore the debtor company to profitable trading where this is practicable;
b. To exploit the return to creditors as a whole where the company itself cannot be saved;
c. To set up a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a redistribution of rights and;
d. To provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book, and where appropriate, deprived of the right to be involved in the management of other companies.
Cross Border Insolvency:
Cross-border insolvency is a term used to describe circumstances in which an insolvent debtor has assets and creditors in more than one country. A cross-border insolvency matter would arise with regard to a company in the following situations:
a. A company may have dealings with parties situated in other countries
b. The company may own interest in properties in other countries.
c. Liabilities may be owed to whose forensic connections with a different country than which the debtor is connected
If the National Company Law Tribunal is properly constituted then cross-border insolvency will function magnificently.
Risks of cross-border insolvency:
a. Identifying and locating the debtors’ assets;
b. Converting the assets into a monetary form;
c. Identifying and reversing any voidable or preference transactions which occurred prior to the administration;
d. Identifying creditors and the extent of their claims
e. Making distributions to creditors in accordance with the appropriate priority
Procedure for Corporate Insolvency:
A new National Company Law Tribunal (NCLT) has been established after enforcing the second amendment act. The powers of the tribunal are;
a. To consider for revival and rehabilitation of companies.
b. To consider the matter relating to the winding up of companies.
c. To deal with the pending liquidation applications transferred from the High Court.
Application for revival to NCLT:
The Board of Directors of the company may apply to the NCLT and prepare a scheme for the revival and rehabilitation of the company. The application and scheme must be accompanied by a statement prepared by the company's auditor.
Inquiry by NCLT:
The NCLT may make inquiries about the financial state of the company and its prospects. They may require a group of experts to assist in making the inquiry. The NCLT can make an order putting a scheme in place or ordering that the company be liquidated. Creditors may also put forward a scheme.
Approval of Scheme:
Approval of a scheme requires consent of all parties by providing financial assistance within 60 days. However, a non-reply is taken as consent. Every party providing financial assistance has a right of rejection. This right of rejection cannot be overridden by a Court.
In a rehabilitation, the debtor remains in possession of the entity. If the NCLT comes to the conclusion that the sick industrial company cannot be revived and that it is just and equitable for the company to be wound up, the Tribunal shall order the winding-up of the company. A levy is charged on each company to establish a rehabilitation and revival fund for sick industrial companies.
The Companies Bill, 2011- Restructuring and insolvency of company.(Clause.254)
The Companies Bill, 2011 offers superior role for professionals in the area of restructuring and insolvency of company.
a. The Tribunal may appoint a company administrator from the panel of company secretaries, Advocates, CA’s. CWA’s maintained by the central government.
b. They will prepare a scheme of revival and rehabilitation.
c. If revival scheme is not approved by the creditors, the tribunal shall order for winding up of the company.
d.No civil court shall have jurisdiction in respect of any matter on which tribunal or Appellate tribunal is empowered.
Role and Responsibility of Insolvency practitioners:
An insolvency practitioner has various roles and responsibilities to perform with paramount care at the time of company insolvency.
1. Company Administrator: An insolvency practitioner may act as a company administrator in case of Revival and Rehabilitation of a sick company.
2. Company Liquidator: An insolvency practitioner may act as a company liquidator in case of winding up of a company.
3. Negotiator and Arbitrator: An insolvency practitioner may act as a negotiator and arbitrator between different stakeholders.
1. To collect the company assets,
2. To determine the outstanding claims against the company,
3. To ascertain any misconduct which has caused prejudice to the general body of creditors.